Hurricane Katrina Tax LegislationMarie Byrne and Thomas Tatro
October 14, 2005 — 1,254 views
The Katrina Emergency Tax Relief Act of 2005 (KETRA), signed by the President on September 23, 2005, provides immediate relief to both individuals and businesses in the disaster-stricken areas of Louisiana, Mississippi and Alabama. The following is a summary of some of KETRA's important provisions:
Individual Relief - Withdrawals from IRAs and Qualified Plans:
KETRA provides for penalty-free hardship withdrawals and loans from retirement plans that choose to apply those provisions. To qualify, an individual must have had a principal residence in the Hurricane Katrina Disaster Area on August 28, and must have suffered an economic loss. A "Hurricane Katrina Disaster Area" is an area that, according to the President, warrants public assistance from the Federal Government. Until December 31, 2006, qualified individuals may withdraw up to $100,000 for any Katrina-related hardship, either from an IRA or from qualifying accounts in certain types of employer-sponsored plans, without being subjected to the 10% early withdrawal penalty rules. These hardship withdrawals are not eligible for rollover and are not subject to the usual 20% withholding rules, but are subject to federal income taxation. A special three-year income tax averaging method applies to the amount withdrawn, however, unless the recipient elects otherwise. In addition, if the amount is recontributed within three years to an eligible retirement plan that accepts rollovers, then the contribution is treated as a timely rollover and an amended return(s) may be filed to recover federal income taxes paid. For plans that already allow loans (or certain types of non-IRA plans that will be amended later to allow loans), Katrina-related hardship loans up to $100,000 (double the usual limit) may be made to the same class of eligible individuals. Loan installment payments that are due by the end of 2006 may be delayed by up to one year without tax consequences. KETRA also contains additional provisions relating to employee benefits. Those provisions and regulatory relief from various federal agencies will be addressed separately in an alert devoted solely to employee benefits issues.
Work Opportunity Tax Credits
Work Opportunity Tax Credits (WOTC) are employer tax credits designed to encourage companies to hire hurricane survivors. The credit equals 40% of the first $6,000 of wages paid to the employee in the first year, with the maximum credit being $2,400 per employee. No credit is allowed for any individual who has been previously employed by the employer. The WOTC is effective for qualified Hurricane Katrina employees. To qualify, an individual must have made his or her principal residence within the Hurricane Katrina core disaster area on August 28, 2005, and be hired during the two-year period beginning August 28, 2005 for a position within the core disaster area, or be hired outside of the core disaster area during the period between August 28, 2005 and December 31, 2005. The "core disaster area" comprises those areas that, according to the President, warrant individual and public assistance from the Federal Government.
Casualty Losses and Discharge of Indebtedness Income
Various other provisions of KETRA will significantly impact individuals and corporations. Casualty or theft losses suffered as a result of Hurricane Katrina will not be subject to the 10% of AGI floor typically applied, and will now be treated as a separate deduction. KETRA also extends from two to five years the period for replacing destroyed, stolen, and condemned property, where the property is involuntarily converted due to Hurricane Katrina. Discharge of indebtedness related to Hurricane Katrina will not trigger the realization of income, so long as the individual lived in the core disaster area, or lived in the Hurricane Katrina Disaster Area and suffered economic loss directly from Hurricane Katrina.
Increased Charitable Deduction Limits
KETRA facilitates charitable contributions for Katrina relief by eliminating the percentage limitations that would otherwise apply to individual and corporate donors for cash contributions made during the period beginning August 28, 2005 and ending December 31, 2005. KETRA also expands the ways in which individuals and businesses may make deductible contributions, including taking individuals displaced by Katrina into their homes and allowing all types of businesses (not just C corporations) to make fully deductible donations of food inventory. The charitable standard mileage rate has been raised from $0.14 per mile to $0.34 for use of a vehicle in providing donated services to a charity for relief related to Hurricane Katrina.
Extension of Tax Deadlines
The IRS had extended the deadlines for filing tax returns and making tax payments until January 3, 2006 for affected taxpayers. KETRA extends these deadlines until February 28, 2006 for excise, employment, income, estate and gift taxes.
Congress has specifically made these tax incentives available to those businesses and individuals that have been affected by Hurricane Katrina. Individuals will not necessarily be able to rely on this legislation to ease any burdens that they may have endured as a result of other natural disasters that have already occurred, or those that might arise in the future.
The information discussed in this article is believed accurate at the date of publication and changes may have subsequently occurred. The foregoing is intended to provide general information and not to provide specific legal advice as to any particular matter.
IRS Circular 230 Disclosure: Under requirements imposed by the IRS, we inform you that, if any advice concerning one or more U.S. federal tax issues is contained in this communication (including any attachments), such advice was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein.
Marie Byrne and Thomas Tatro